Hotel Valuation

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Hotel Valuation

• David G. Pope, MAI, SRA, SGA
• Hotel and Club Associates, Inc.
• 3717-D West Market Street
• Greensboro, NC 27403
• 336-379-1400
• dpope_at_hotelandclub.com

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Types of Lodging

• Full service restaurant, lounge, large meeting
  spaces
• Select service small restaurant or bistro, less
  meeting
• Limited service limited food/beverage, meeting
• Extended stay longer guest stays, small
  kitchens
• Boutique unique, usually upscale
• Bed and breakfast owners quarters/lifestyle for
  innkeeper

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Hotel
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Motel
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Hotel
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Bed and BreakfastBB
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Major Franchises

• Hilton Worldwide
• Hilton full service
• Embassy Suites full service
• DoubleTree full service
• Hilton Garden Inn select service
• Hampton Inn limited/select service
• Homewood Suites upscale extended Stay
• Home2 Suites midscale extended stay

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Major Franchises

• Marriott Hotels
• Marriott full service
• Ritz Carlton full service luxury
• Renaissance Hotel full service
• Courtyard by Marriott select service
• Springhill Suites limited/select service
• Fairfield Inn and Suites limited/select service
• Residence Inn upscale extended stay
• TownePlace Suites midscale extended stay

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Major Franchises

• Intercontinental Hotels Group IHG
• Holiday Inn select/full service
• Crown Plaza full service
• Hotel Indigo full service
• Holiday Inn Express limited/select service
• Staybridge Suites upscale extended stay
• Candlewood Suites midscale extended stay

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Major Franchise

• Choice Hotels
• Clarion Hotel full service, midscale
• Comfort Suites/Comfort Inn limited service
• Sleep Inn limited service
• Quality Inn limited/full service typically
  reflagged
• EconoLodge limited service
• Mainstay Suites extended stay

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Other Franchises

• Hyatt Hotels Hyatt Place, Hyatt House
• Wyndham Hotels Days Inn, Microtel, Ramada, etc.
• Starwood Hotels aloft, Four Points, Sheraton,
  Westin
• LaQuinta
• Best Western
• Carlson Redizor Group Country Inn Suites
• Value Place

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Hotels vs. Other Investment Real Estate

• Length of tenancy - hotels tenancy nightly
  contracts
• Hotels have varying sources of revenues
• Hotels more labor intensive
• Operating expense ratios higher for hotels
• PIP Property Improvement Plans Frequent
  Renovations
• Risk levels hotel vs. other real estate
• How are risk levels priced in the market?
  capitalization rates, discount rates, multiples
  of income

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Measures of Performance

• Occupancy Occupied Rooms Rooms Available
• ADR - Average Daily Rate Nightly Avg Rate for
  Rooms Sold
• Rack Rate Advertised Rate
• ADR Typically Lower than Rack Rate
• RevPar Revenue per Available Room

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Sources of Market Information

• Smith Travel Research
• STAR Reports
• Custom Trends Reports
• Market Forecasts
• Revenue and Expense Reports
• www.str.com
• PKF Hospitality
• Investor Surveys
• Income and Expense Benchmarking
• www.pkfc.com
• Hotel Broker Specialists Websites

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Valuation Considerations

• Franchise Affiliation
• Not all brands are equal
• Is property eligible for re-licensing
• Example Exterior Corridor Hampton Inn
• Age/Condition
• PIPs Property Improvement Plan
• Market Segment
• Interior or Exterior Corridors

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Valuation Approaches

• Income Capitalization Approach
• Sales Comparison Approach
• Cost Approach

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Income Capitalization Approach

• Projection of Revenues and Expenses
• Room Revenues net of sales and occupancy taxes
• Smith Travel Reports STAR Reports
• Historical Operating Statements from Owners
• Uniform System of Accounts for Hotels
• Capitalization of Net Income
• Direct Capitalization Overall Capitalization
  Rate
• Common method especially for upper midscale and
  higher
• Market for Hotel Investments Regional
• Analyze Sales and Subject Using Market Expenses

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Capitalization of Income

• Develop Appropriate Overall Capitalization Rate
• Sources of Capitalization Rates
• Analysis of Sales of Similar Properties
• Brand similarities
• Date of Sale
• Age/Condition
• Many times necessary to include sales from other
  areas
• Investor Surveys
• PriceWaterhouseCoopers
• PKF Hospitality
• Major Brokerage Firms Research Reports

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Sample Capitalization
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How are You Feeling at this Point??
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Room Revenue Multiplier

• Room Revenue Multiplier RRM
• RRM Sale Price/Value Room Revenue
• exclude occupancy taxes and sales taxes
• Value Room Revenue x RRM
• RRM - Income or Sales Comparison Approach?
• Frequently Used in Market Especially for Mid
  Tier and Under Properties, Mom-and-pops, BBs
• Develop RRMs from Sales and Conversations with
  Market Participants
• Simple but Effective Valuation Tool

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Example RRM
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Sales Comparison Approach

• Comparison of Subject with Sales/Listings of
  Similar Properties
• Comparability
• Franchise Affiliation
• Exterior vs. Interior Corridors
• Age/Condition
• Market Segment
• Date of Sale
• Location
• RevPar

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Sales Comp Units of Comparison

• Price Per Room
• Room Revenue Multiplier - RRM
• Gross Income Multiplier GIM
• Observation properties with higher
  revenue/income per room tend to sell at higher
  prices per room assuming all other things
  reasonably similar
• Observation - Price per room comparisons based on
  physical features and adjustments based on
  physical features can be difficult and
  potentially misleading.

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Hampton Inn 1st Generation
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Hampton Inn2nd Generation
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Hampton Inn Newest Generation
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Hampton Inn 2nd Generation Requires Exterior
Renovation
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Hampton InnForever Young Renovation Underway
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Hampton InnForever Young Renovation Underway
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Hampton Inn Forever Young Renovation
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Sales Comparison cont.

• Advice In using price per room comparison with
  comparable sales, try to select sales that have
  similar franchise affiliations with similar
  RevPar potential
• If using traditional adjustment grid, be mindful
  of RevPar differences
• Dont compare an apple and an orange and try
  to compensate for differences with adjustments
• Other Issues to consider
• PIP Property Improvement Plans

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Sales Comparison Cont.

• Sources of Sales Data
• Hotel broker specialists
• Published Research Reports

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Cost Approach

• Land Valuation
• Hotels developers frequently buy the rear sites
  
• Hotels are destination commercial properties
• Dont typically buy the prime retail/frontage
  sites
• Units of comparison
• Price per Square Foot
• Price per Room

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Replacement Cost

• Replacement/Reproduction Cost
• Cost Manuals can be challenging
• Actual Cost Comparables better

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Depreciation

• Types of Depreciation Physical Depreciation
  Functional Obsolescence, External Obsolescence
• How to Measure Depreciation?
• Franchised hotels major renovations/PIP every
  5-7 years
• Many hotels block and plank construction
  buildings potentially have very long physical
  lives BUT..
• Consumer taste change frequently exterior
  corridor hotels

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Reconciliation

• Market Typically Prices Hotels Based on
  Revenue/Income Considerations
• Most Meaningful Methods (most cases)
• Overall Capitalization Income Approach
• RRM Sales Comparison Income Approach
• Cost Approach Least Reliable in Most Situations
• These Approaches Reflect Value of Total Going
  Concern

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Allocation of Value

• Total Going Concern Components
• Real Property (land and buildings)
• Tangible Business Personal Property FFE
• Intangible Business Value
• Necessary to Allocate for Taxation Purposes
• Start Allocation with Total Going Concern
• Total Going Concern generally what is bought/sold
  in market
• Building value based on individual components
  would be subjective
• Tangible Business Personal Property Set by
  Property Tax Filings

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Intangible BEV

• Intangible Business Enterprise Value
• Much controversy within appraisal community as to
  how to measure it
• Discussion as time permits

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Sample Allocation